Week in review: The hangover kicks in

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This week: Global markets sell off, healthcare stocks get sick and a famous frowning feline wins a lawsuit.

Stock markets have touched record highs, with global equities enjoying their best start to a year since 1987. In part, this is because investors appeared to believe that economic growth would continue without an accompanying upsurge in inflation. But the history of investing is littered with examples of complacency, and this week’s sell-off may act as a warning that the party is coming to an end.

The sell-off started in the U.S. Treasury market, as traders decided the Federal Reserve (Fed) might actually follow through with its plans to raise interest rates several times during 2018. Rising interest rates should make bonds less attractive relative to cash holdings, yet despite the Fed’s well-flagged intention to increase rates towards “normal” levels, yields on 10-year Treasuries have barely budged above 2.5% in recent months. However, this week’s sell-off caused yields to jump to a four-year high of 2.75%.

No sympathy from the Fed

The Fed did nothing to ease investors’ frayed nerves. At the U.S. central bank’s January meeting – Janet Yellen’s final meeting as Fed chair – the federal funds target interest rate was kept unchanged. However, the Federal Open Market Committee upgraded its outlook for inflation and confirmed that further rate rises lie ahead.

The prospect of rising borrowing costs spells potentially bad news for companies, especially those that have been relying on cheap money to grow. Fears that time might be called on their debt-fueled jamboree prompted investors to start selling equities. Over the week to the close on Thursday, the S&P 500 Index fell by 1.7%. In the UK, the FTSE All-Share Index fell by 2.2%.

European shares were spared some of the pain early in the week, benefiting from positive economic news, including the release of a very healthy survey of the region’s manufacturing companies. Nonetheless, the FTSE Europe (ex-UK) Index ended the week lower by 1.6%.

Healthcare stocks get sick

Company news added to investors’ sore heads. Amazon, a company synonymous with the phrase “disruptive innovation” (but not with big profits) announced it has set its sights on a new industry. Its tried-and-tested formula has proved irresistible to consumers within music, television and home shopping markets. But one industry – healthcare – has proved impervious to Jeff Bezos’ blandishments.

All that could now change. Amazon has linked with JP Morgan Chase and Berkshire Hathaway to form a not-for-profit company whose aim is to lower healthcare costs for the trio’s million U.S. employees – and, potentially, the rest of the U.S. population. Warren Buffett, CEO of Berkshire Hathaway, colorfully described the huge increase in American medical bills as a “hungry tapeworm.”

As yet, details are sparse, but the new company is expected to focus on technology solutions to lower costs. The opening salvo has been taken seriously by markets; a clutch of healthcare-related companies – including Cigna, Anthem and UnitedHealth – suffered big reverses in their share prices.

A source of woe

UK shares continued to be affected by the fallout from the Carillion liquidation. Fellow outsourcer Capita warned on Wednesday that its 2018 profits would be well short of market expectations. The UK outsourcing specialist also suspended its dividend and announced a £700 million (US$966 million) rights issue. Since the collapse of Carillion two weeks ago, the government has had to step in to ensure the continuation of key services, including school meals and hospital cleaning.

Capita’s responsibilities include a plethora of government contracts, including National Health Service administration and the collection of BBC license fees. The news sent Capita’s share price down 47%, wiping £920 million (US$1.3 billion) off its market value.

And finally

The owners of a melancholy moggy in California had grins like Cheshire cats this week after being awarded more than $700,000 in a lawsuit over use of the cat’s image. Tabatha Bundesen, the owner of the sorrowful sourpuss had been paid $150,000 by U.S. coffee company Grenade for the use of her pet’s picture on its “Grumpachino” coffee range. The forlorn feline, who rejoices in the name Tardar Sauce, has a form of dwarfism, resulting in a permanent scowl. Tardar’s Instagram pictures caused something of an internet sensation when they emerged in 2012. However, a judge ruled that Grenade had exceeded the terms of the deal and awarded Ms. Bundesen damages for copyright and trademark infringement. Presumably the owners of the coffee company were left feline hard done by, and will paws for thought before their next ad campaign.

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